It’s clear Americans are really annoyed about the government shutdown currently underway. A poll conducted this week by CBS News found 72 percent of Americans oppose shutting the government down over opposition to the Affordable Care Act, and Congress’ approval rating is down in the single digits.

I don’t spend a lot of time writing about Social Security because I’m only in my early 30′s. If the topic of Social Security comes up with my friends, it’s usually followed by disparaging comments about how it’s underfunded and won’t exist in thirty years when I’m eligible to start receiving it (which probably isn’t that far off). Sadly, the solvency of Social Security is (mostly) simple math. New workers contribute, older retirees withdraw, and the system works similar to a Ponzi scheme, except everyone knows it. The tricky part comes when you start messing with the contributions, such as with the payroll tax cuts, or you don’t leave the contributions alone.

On several occasions, when playing golf with my good friend and his dad, the dad has joked about how he hasn’t gotten a raise in three years. He’s semi-retired and is getting Social Security payments and his “I haven’t gotten a raise” joke is in reference to how Social Security hasn’t gotten a cost of living adjustment (COLA) in three years. The last time there was a COLA for Social Security was back in 2009, when it was increased 5.8%. The SS COLA is supposed to adjust benefits so they keep on pace with inflation, which seems like a very sensible thing to do, but official inflation figures (CPI-W is used for SS COLA) has been low these past few years and a 3rd quarter spike in inflation in 2008 (resulting in that 5.8% increase for 2009) gave the COLA a ton of ground to cover, so there has been no adjustment these past few years.

Well, the wait is over, the cost of living adjustment for Social Security will be 3.6% starting in January 2012. That’s the good news. The bad news is that the premiums retirees are expected to pay for Medicare Part B is probably going to go up, thus taking a piece of that COLA bump. That won’t be announced for another month though.

As experts debate potential changes to Social Security to improve is deteriorating financial situation, one of the ideas that’s been offered is that of a Social Security IRA. I first read about it when it was mentioned by the founder of the Association of Mature American Citizens in the wake of the news that the AARP was in favor of changes to Social Security. AMAC said that in order for them to support increasing the full benefit age from 66 to 69, they would require the mandatory offering of a Social Security IRA.

What exactly is this Social Security IRA? It sounds a lot like the privatization of Social Security (which was a red hot political term for many election cycles), by putting it into an IRA and letting the wage earner direct the investments. Their proposal is to make it tax deductible, payroll deducted, and owned by the wage earner (rather than sitting in a “lockbox”). You couldn’t withdraw any funds until retirement (62-65) and 50%+ of the funds would have to be put into “guaranteed interest accounts.”

What’s the downside in all this? As is the case with any investments, people usually don’t make the best decisions since they’ll be governed by their emotions. How would your average wage earner have reacted to the gyrations of the market the last two or three years? We all know that market timing doesn’t work, people were overall terrible at it through this last crisis, so do we really want to offer up that much control over Social Security?

I think people should be able to manage their own money, even if they’re terrible at it. You have to educate people, not shelter them from difficult decisions. I think Social Security is an imperfect system but I also know that giving people that much control, despite my belief that people should have that much control, can be dangerous.

That said, I like that this is being discussed because something has to change about how our entitlement programs operate.

Having just passed the thirty mark a short time ago, I usually don’t follow too much about that end of retirement on Bargaineering. I try to keep up to date on it, since I’d like to know how likely it is I’ll be collecting Social Security in thirty years, and so this latest news that the AARP is dropping its opposition to Social Security cuts is pretty big news. As we all know, lobbying (and money in general) equals influence in Washington and this opens the door for a restructuring of Social Security. A restructuring that we probably need pretty badly.

What’s wrong with Social Security?

Social Security, which was created in 1935, is facing a demographic challenge as the baby-boom generation retires with fewer younger workers to support it. The program’s actuaries say that by 2036, the program will have exhausted its reserves and will only be able to pay 77% of promised benefits. Between now and 2036, the government, which has spent the money held in reserve, will have to borrow to meet those obligations.

It’s always been the third rail in politics because seniors vote early and often. Alienating them is hazardous to your politic health.

I’m eager to see what happens out of this and hopefully it’s a compromise that results in a stronger/solvent Social Security program.

Several years ago, I was surprised to receive my first Social Security Estimated Benefits Statement. Now, three statements later, it turns out those mailers will no longer be going out in a cost cutting move (it costs around $70 million a year). Personally, I welcome the change because I’m all for reducing paper waste (which I see these reports as) but I don’t like how I can’t view my actual report online. The best you can do is use their estimator, but you need to enter in your information manually. Thumbs down to that.

The SSA announced that the change was going to start in April and since the reports are mailed out three months prior to your birth month, anyone born in July or later won’t get one this year. In fact, when the fiscal year resets, they are only planning on mailing the statements out to people aged 60 and older who haven’t started to receive benefits.

While some people see the mailers as a work of fiction, others use it as part of retirement planning and so I can understand why people are upset they can’t see actual numbers anywhere. I’m all for electronic records, I don’t need the piece of paper, but you can’t suspect paper reports without offering electronic access. It’s like a credit card company saying they are doing paperless statements but you can’t actually log on anywhere to view your statement.

Remember when Warren Buffett famously declared that he paid a lower tax rate than his administrative assistant? It probably confused a lot of people who aren’t familiar with the myriad of ways our income is taxed and that confusion can lead to misplaced frustration and anger. With how charged politics can be, it’s not uncommon for people to get really passionate and fired up over things that they’ve misunderstood.

A prime example, outside of money and politics, is the issue of vaccines and autism. The link between the two was based heavily on the fraudulent work of Dr. Andrew Wakefield in what has now been declared an “elaborate fraud.” Yet autism is a very real problem, one whose cause is still unknown, and people still insist on not vaccinating their children. While I think I have a right to tell people what to do, the fact that this vehement rejection of vaccines is based mostly on a fraud is just one example of this.

So today, I hope to explain how our income is taxed and hopefully that will remove some of the existing, incorrect, ideas some people have about our tax structure.(Click to continue reading…)

There have been a lot of commenters wondering why their tax withholding went up this year after hearing about the stimulative 2% payroll tax holiday passed last year. The 2% payroll tax holiday reduced the normally 6.2% Social Security withholding to only 4.2% but some people have seen their withholding go up. What gives?

Last year, the Making Work Pay credit reduced everyone’s income tax by 6.2% up to $400. Anyone who earned over $6451 received a maximum $400. That credit expired this year and was effectively replaced by a 2% reduct that had a much higher ceiling, $2,136.

How the difference affects you:

If you earn more than $20,000, then you should see a reduction in your withholding because a 2% of $20,000 is $400.

If you earned less than $20,000 then you’ll see an increase in your withholding because the 6.2%, even with a $400 cap, is higher than the reduction of 2% in Social Security.

Finally, your employer may not have implemented the payroll tax holiday yet, the IRS gave them a January 31st to fix it with any differences reconciled by March 31st. While your Making Work Pay credit has definitely been removed, the payroll tax holiday may not be implemented yet.